BY PERRY BROTHERS
The Cincinnati Enquirer
How was she to make it through another minute, much less the rest of her life, without him? Betty Martin didn't know the answer after her husband of 27 years, Desmond Martin, died unexpectedly in 1990. Quickly, that question was overtaken by others, such as how would her family survive financially?
Like so many spouses who lose their partners suddenly, Mrs. Martin had no idea what financial steps she needed to take first. Mr. Martin had handled the finances.
Fortunately, he'd left a list of the family's financial documents in a desk drawer. Within hours of his death, many important decisions awaited Mrs. Martin, decisions that she felt unprepared to make. "Grieving really hits you hard the first few months, and it's just the wrong time to be going through all this stuff," said Mrs. Martin, 55.
Financial planners and insurance agents advise planning ahead for death, but who wants to think about losing a loved one?
"I can't tell you how many people come in here without a will," said Don Westermeyer, a certified financial planner with American Express Financial Advisors Inc. in Cincinnati. "When you ask what would happen if they died, the spouse looks at their wife and says, 'Well, I want them to have it all.' But you have to have the right things in place to make sure that happens."
Planning for death also is easy to put off because there are so many options.
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LIFE INSURANCE ALLOCATIONS
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For a more comprehensive look at life insurance needs, Chuck Osmond, vice president of advanced underwriting at Union Central, gave an example of a two-income family (each spouse earns $50,000 a year) with children ages 11 and 15. The couple has a home mortgage of $120,000 and assumes no other savings.
If a $426,000 lump sum was received at the death of either spouse, these life insurance proceeds would provide the benefits for the following goals:
$118,000 - to replace 40 percent of the spouse's lost income for seven years until the youngest child is 18 (invested at 8 percent and adjusted for inflation at 3 percent).
To get this, Mr. Osmond started with the $118,000, added 8 percent interest (or $9,440) for the first year and subtracted $20,000 (40 percent of the spouse's pay), leaving $107,440 after the first year. Continue this formula for each of the seven years, except you must add 3 percent inflation to the spouse's lost income each year.
$150,000 - to pay off the mortgage, with the remaining $30,000 for final expenses and to provide an emergency fund.
$158,000 - to pay for college expenses of $20,000 a year for each child, assuming an annual increase in tuition costs of 7.8 percent.
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Do we want a will? A trust? What do we have to do for estate tax planning? Do we need a financial planner, a lawyer, an accountant or all three? There is no easy answer to those questions, as each situation dictates its own planning needs. To ease into the process, Mr. Westermeyer encourages clients to start with an analysis of the what-ifs.
"I ask the spouse, particularly if it's a stay-at-home spouse, 'Are you going to go back to work?' " he said. Working from there, Mr. Westermeyer examines each facet of the couple's financial goals to determine what would change if one spouse died.
"It all kind of blends in with financial planning," Mr. Westermeyer said. "As long as two people are alive, they may be able to see their whole family through college. Well, if one of them dies, that may all go up in smoke."
The ultimate goal is to ensure that the surviving spouse and dependents maintain their standard of living after a death.
Financial planning can set the legal documents in place to pass existing assets to survivors, but a close look at replacement income, or life insurance coverage, should be the next step.
A recent study by the Life Insurance Marketing Research Association International reported that 25 percent of women under 45 had significantly lower incomes after the death of their husbands. Twenty-eight percent of women older than 45 reported significant income drops. For men, 15 percent under 45 - and 18 percent of those older than 45 - cited a significant drop. Thirty-nine percent of women and men under 45 reported that their spouses' life insurance coverage was inadequate.
Cincinnati-based Union Central Insurance and Investments Co. co-sponsored the study.
Chuck Osmond, vice president of advanced underwriting at Union Central, said that to determine adequate coverage, a couple should examine each expense that could arise in the event of a spouse's death.
"It's really difficult to talk about these matters on a purely financial basis," Mr. Osmond said. "It's really kind of a cold and seemingly heartless analysis to reduce it to numbers, but it's really important to couples."
Say, for example, a couple is a one-income family and the husband is at home and cares for their two children, ages 2 and 4. If the husband dies, that child care could add up to $20,000 a year. This number will shift as the children enter school.
Many companies, because of tax benefits, offer employees group term insurance ranging in amount from $10,000 to $50,000. The rule of thumb is to estimate replacing 70 percent of the deceased spouse's income. The time varies, depending on the needs of the family.
With a financial planner or on your own, examine your life insurance coverage.
Determine your financial assets, goals and the cost and time frame of those goals (be sure to factor in investment return expectations, typically 7 percent or 8 percent). Then, for whatever period the goals dictate, subtract the amount that would be lost if one spouse died. Reduce that amount by about 30 percent, and you have a ballpark lump sum that you would need.
If a couple chooses to supplement life insurance coverage, there basically are two choices: permanent and term-life insurance. Mr. Osmond said couples should look at the long-term costs of both types of insurance.
The questions to ask yourself:
- Is this a permanent need or a temporary need?
- Am I going to need this only until my kids go to college?
- Am I going to need this only until I pay off my mortgage?
Once the need and duration are established, check out several companies' quotes for permanent and term coverage. Term insurance often is a cheaper option until the policyholder reaches age 40; then the premiums can skyrocket.
Mr. Osmond suggests that younger couples look into term insurance that can be converted to permanent coverage over time. Many companies allow term policyholders to gain credit toward a permanent policy. Even with the appropriate policy in place, both spouses should be familiar with the family's investment strategy and long-term financial plan.
Eight years after the death of her husband, Mrs. Martin said she has been fortunate. Mr. Martin planned for his family's financial survival in the event of his death. She has been able to maintain her standard of living and see both of her children through to college.
But Mrs. Martin, who leads a survivor's group called Good Mourning in her home, said it's best to be prepared. Survivors with limited financial savvy are easy targets for financial schemes.
"I was in shock. Here I am not knowing what's going on because I'm numb from the death," Mrs. Martin said. "I'm doing all of this (financial planning) at the worst possible time of my life. That was just the wrong time to handle something like that, especially when the death is a shock."
